The Japanese Software Industry:
What Went Wrong?
(and Why Is It Important?)

Robert E. Cole
Emeritus Professor: Haas School of Business
UC Berkeley
cole@haas.berkeley.edu
Visiting Researcher, ITEC,Doshisha University, Kyoto, Japan

Doshisha Specialist Lecture
11/26/14

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Emerging Transformational Signs• Hardware depts. reporting to software (sw) depts.
• Hw companies turning into (sw) companies• Sw co’s now buying hw companies• R&D departments more populated by sw personnel• More of the value of high tech products contributedby sw meeting user needs, through enabling newfunctionalities.

Harvard University Presentation,
Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Presentation Plan
• Sw as key driver of manufacturing capability• Results of an analysis of U.S. & J. IT patents• Strengths & weaknesses of Japanese software• Comparative status of IT jobs in industry• Sw’s contribution to productivity

Harvard University Presentation,
Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Monozukuri and Software• Software increasingly drives manufacturing
capability, through creating value and delivering
services• Monozukuri view sees sw as simply a facilitator ofhardware capabilities.

Harvard University Presentation,
Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Why is Japanese Hi-tech Manufacturing
Losing It’s Global Competitive Edge?
• J. firms excessive confidence in their monozukuri• Quality perfectionism inhibits IT innovation• What counts now is making quick strategic
decisions, software capabilities & going global• Not enough for management to build up existingcore capabilities when meeting new challenges.
* Adapted from Kimura, Hidenori, Dir., Riken BSI-Toyota Collaboration Center.

Harvard University Presentation,
Weatherhead Center Program, U.S.-JapanRelations 9/16/14

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CMU Researchers’ Findings Regarding U.S. & J. IT
Sector Patents Granted by USPTO:1980-2004• IT Innovation increasingly sw intensive• Hw patents increasingly cite sw patents• J. IT innovation relies less on sw advances than U.S.IT innovation• Sw innovation performance of Japanese IT firms increasingly
lags U.S. counterparts, particularly in sw intensive IT sectors• J. hi tech firms disproportionately located in less sw intensive
sectors & within those sectors, they are less sw intensive.
Source: Arora, Branstetter and Drev. “Going Soft: How the Rise of Software Based Innovation
Led to the Decline of Japan’s IT Industry and the Resurgence of Silicon Valley,” Review ofEconomics and Statistics, 2012.
Harvard University Presentation,
Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Strengths of Software Practices as
Deployed in Japanese Firms (1)• Quality, quality, quality?

Harvard University Presentation,
Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Strengths of Software Practices as

Deployed in Japanese Firms (2)• Operational effectiveness of Software
Development

Harvard University Presentation,Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Strengths of Software Practices as
Deployed in Japanese Firms (2a)• Operational effectiveness of Software
Development

Harvard University Presentation,
Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Survey Results Comparing U.S. and J. Global
Firms Use of IT in Business Management (1)How important is IT/Information System
Investment?
JapanU.S.
• Very important
16%
75%• Important
53%
20%• Can’t Say
24%
4%• Not Very Important 7%
2%
Harvard University Presentation,
Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Survey Results Comparing U.S. and J. GlobalFirms Use of IT in Business Management (2)What has been the impact of IT on the firm up to now?
• J. respondents top choice
Efficiency of internal business and reduction of labor
hours (44%)• U.S. respondents top choice:
Faster and more efficient provision of products andservices (54%).
Harvard University Presentation,
Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Additional Weaknesses of SW Practices as
Deployed in Japanese High Tech Firms• Major and medium size corporations thinly
staffed with IT professionals• Low levels of in-house software development• Weak, and often non-existent, CIO positions• Thin IT staffing leads to risk aversion and overreliance on system integrators.
Harvard University Presentation,
Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Hardware Comes First•“We did not bring software engineers into product development
at the beginning. The hardware engineers would begin the productand then software would come in after the fact. And that’s because
in a company that has jobs for life, the older people are at the top
and the younger software engineers are on the bottom, pushingup. So there is a kind of generation gap.”•Organizational culture shapes performance metrics and theorganizational culture of Japanese manufacturing firms wascreated, nurtured and sustained by hw engineers over the last 60+years•Takes strong management leadership to overcome employee
commitment to past success factors

Harvard University Presentation,
Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Best Jobs in America
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Top 20Rank

Job Title
Sector (Total Jobs)
Median Salary/Top Pay

2Systems Engineer Physician AssistantInfo Technology (88,000) Healthcare (82,000)$87,100 / $130,000$90,900 / $124,000

73456College Professor
Education (278,000)$70,400 / $115,000

Nurse Practitioner
Healthcare (23,000)$85,200 / $113,000

IT Project Manager
IT (174,000)$98,700 / $140,000

Certified Public
Accountant
Financial (189,000)$74,200 / $138,000

89

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1112

Anesthesiologist
Healthcare (23,000)$292,000 /$408,000

Software Developer
IT (796,000)$79,400 /$116,000

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Physical Therapist Computer/Network Intelligence Analyst
Sales Director
Healthcare (181,000) Security Consultant Government (51,000)
Sales &$74,300 /Marketing (97,000)
IT (13,000)$82,500 /$98,100$140,000 /$99,700 /$115,000
16$239,000$152,0001314

Pharmacist
Occupational
Healthcare (198,000)
Therapist$109,000 /Healthcare (107,000)$134,000$69,700 /$100,000

1516

1718

Nurse Anesthetist
Healthcare (19,000)$157,000 /$214,000

Software ProductManagerIT (37,000)$106,000 /$148,000

Business
Analyst, IT
IT (125,000)$82,600 /$119,000

Attorney/
LawyerLegal (541,000)$115,000 /$262,000

20

Human
Physician/Resources
General PracticeManager
Healthcare (90,000)
Other (226,000)$150,000 /$71,800 /$228,000$111,00014Source: CNN/Money Survey: 2009.

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Table 2 Analysis of Primary Factors in
Total Factor Productivity (TFP) Growth(in percent)
UNITED STATESTFP GrowthIT
Computers
SoftwareComm. Equip.
Non-ITJAPANTFP GrowthIT
Computers
SoftwareComm. Equip.
Non-IT

1960-95
1995-00
2000-06.56.85.76
Contributions to TFP Growth
.16
.51
.32
.10.37
.15
.03
.06
.08
.04
.08
.04
.40.34.44
1975-95
1995-00
2000-07.86.50.57
Contributions to TFP Growth.04.23.25.07.16.16
-.03
-.01
.01.01.08.07.82.27.32

Source: Motohashi Kazuyuki, 2010. Empirical Analysis of IT and Productivity: Japan-U.S. Comparison
from both Macro and Micro Policy, RIETI Discussion Paper Series 10-P-08, Tokyo: METI.

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Concluding Thoughts• Digitization/IT/SW core technologies of 21st century• Japanese firms need to rethink role of software inglobal competition & build up in-house capabilities• They need to recognize & focus on the value creating
capabilities of software & the full range of innovative
functionalities and services they can provide• Corporate leadership role: Elevate the status,
training and utilization of IT talent• Government role: Incent educational institutions toelevate the quality & quantity of IT students
Harvard University Presentation,
Weatherhead Center Program, U.S.-Japan
Relations 9/16/14

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Embedded and Application Software• Embedded software is computer software, written tocontrol machines or devices that are not typically thoughtof as computers. It is typically specialized for the particular
hardware that it runs on and has time and memory
constraints. A precise and stable characteristic feature isthat no or not all functions of embedded software areinitiated/controlled via a human interface, but throughmachine-interfaces instead.
• Application software is a set of one or more programs
designed to carry out operations for a specific application.
Application software cannot run on itself but is dependenton system software to execute.
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